Indemnity Supplemental Information

12 Months Ended

Dec. 31, 2011

Indemnity Supplemental Information

Indemnity Supplemental Information

Note 23.  Indemnity Supplemental Information

	Erie Insurance Group
	Consolidating Statement of Financial Position
	December 31, 2011
(in millions)	Indemnity	Exchange	Reclassifications	Erie
	shareholder	noncontrolling	and	Insurance
Assets	interest	interest	eliminations	Group
Investments
Available-for-sale securities, at fair value:
Fixed maturities	$   548	$  7,292	$   –	$  7,840
Equity securities	25	564	–	589
Trading securities, at fair value	27	2,308	–	2,335
Limited partnerships	208	1,082	–	1,290
Other invested assets	1	19	–	20
Total investments	809	11,265	–	12,074
Cash and cash equivalents	11	174	–	185
Premiums receivable from policyholders	–	976	–	976
Reinsurance recoverable	–	166	–	166
Deferred income taxes	19	–		19
Deferred acquisition costs	–	487	–	487
Other assets	119	322	–	441
Receivables from the Exchange and other affiliates	254	–	(254)	–
Note receivable from EFL	25	–	(25)	–
Total assets	$1,237	$13,390	$(279)	$14,348
Liabilities
Losses and loss expense reserves	$        –	$  3,499	$     –	$  3,499
Life policy and deposit contract reserves	–	1,671	–	1,671
Unearned premiums	–	2,178	–	2,178
Deferred income taxes	–	147	–	147
Other liabilities	456	383	(279)	560
Total liabilities	456	7,878	(279)	8,055
Shareholders’ equity and noncontrolling interest
Total Indemnity shareholders’ equity	781	–	–	781
Noncontrolling interest in consolidated entity – Exchange	–	5,512	–	5,512
Total equity	781	5,512	–	6,293
Total liabilities, shareholders’ equity and noncontrolling interest	$1,237	$13,390	$(279)	$14,348

	Erie Insurance Group
	Consolidating Statement of Financial Position
	December 31, 2010
(in millions)	Indemnity	Exchange	Reclassifications	Erie
	shareholder	noncontrolling	and	Insurance
Assets	interest	interest	eliminations	Group
Investments
Available-for-sale securities, at fair value:
Fixed maturities	$   264	$  7,279	$   –	$  7,543
Equity securities	24	570	–	594
Trading securities, at fair value	28	2,306	–	2,334
Limited partnerships	216	1,108	–	1,324
Other invested assets	1	19	–	20
Total investments	533	11,282	–	11,815
Cash and cash equivalents	310	120	–	430
Premiums receivable from policyholders	–	942	–	942
Reinsurance recoverable	–	201	–	201
Deferred acquisition costs	–	467	–	467
Other assets	132	357	–	489
Receivables from the Exchange and other affiliates	232	–	(232)	–
Note receivable from EFL	25	–	(25)	–
Equity in EFL (1)	80	–	(80)	–
Total assets	$1,312	$13,369	$(337)	$14,344
Liabilities
Losses and loss expense reserves	$        –	$  3,584	$     –	$  3,584
Life policy and deposit contract reserves	–	1,603	–	1,603
Unearned premiums	–	2,082	–	2,082
Deferred income taxes	26	257	–	283
Other liabilities	374	341	(257)	458
Total liabilities	400	7,867	(257)	8,010
Shareholders’ equity and noncontrolling interest
Total Indemnity shareholders’ equity	912	–	–	912
Noncontrolling interest in consolidated entity – Exchange	–	5,502	(80)	5,422
Total equity	912	5,502	(80)	6,334
Total liabilities, shareholders’ equity and noncontrolling interest	$1,312	$13,369	$(337)	$14,344

(1) On March 31, 2011, Indemnity sold its 21.6% ownership interest in EFL to the Exchange.

Receivables from the Exchange and EFL and concentrations of credit risk

Financial instruments could potentially expose Indemnity to concentrations of credit risk, including unsecured receivables from the Exchange.  A majority of Indemnity’s revenue and receivables are from the Exchange and affiliates.  See also Note 4, “Variable Interest Entity.”

Management fees and expense allocation amounts due from the Exchange were $251 million and $229 million at December 31, 2011 and 2010, respectively.  The receivable from EFL for expense allocations totaled $3 million at December 31, 2011 and 2010.

Indemnity is due $25 million from EFL in the form of a surplus note that was issued in 2003.  The note may be repaid only out of unassigned surplus of EFL.  Both principal and interest payments are subject to prior approval by the Pennsylvania Insurance Commissioner.  The note bears an annual interest rate of 6.7% and will be payable on demand on or after December 31, 2018, with interest scheduled to be paid semi-annually, subject to prior approval by the Pennsylvania Insurance Commissioner.  EFL paid annual interest to Indemnity of $2 million in both 2011 and 2010.

			Indemnity Shareholder Interest
			Income attributable to
			Indemnity shareholder interest
(in millions)			Years ended December 31,
	Percent		2011		2010			2009
Management operations:
Management fee revenue, net	100.0%		$	1,067	$	1,009		$	965
Service agreement revenue	100.0%		33		34			35
Total revenue from management operations			1,100		1,043			1,000
Cost of management operations	100.0%		892		841			813
Income from management operations before taxes			208		202			187
Property and casualty insurance operations: (2)
Net premiums earned	5.5%	(2)	–		216			209
Losses and loss expenses	5.5%	(2)	–		155			145
Policy acquisition and underwriting expenses	5.5%	(2)	–		61			63
Income from property and casualty insurance operations before taxes			–		0			1
Life insurance operations: (1)
Total revenue	21.6%	(3)	10		37			27
Total benefits and expenses	21.6%	(3)	7		26			25
Income from life insurance operations before taxes			3		11			2
Investment operations:
Net investment income (2)			16		37			42
Net realized gains (losses) on investments (2)			3		(1		)	10
Net impairment losses recognized in earnings (2)			0		(1		)	(12		)
Equity in earnings (losses) of limited partnerships			26		21			(76		)
Income (loss) from investment operations before taxes (2)			45		56			(36		)
Income from operations before income taxes			256		269			154
Provision for income taxes			87		107			46
Net income			$	169	$	162		$	108

(1)	Earnings on life insurance related invested assets are integral to the evaluation of the life insurance operations because of the long duration of life products.  On that basis, for presentation purposes, the life insurance operations in the table above include life insurance related investment results.  However, the life insurance investment results are included in the investment operations segment discussion in Note 5, “Segment Information”.
(2)	Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the Indemnity shareholder interest.  Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.
(3)	Prior to and through March 31, 2011, Indemnity retained a 21.6% ownership interest in EFL, which accrued to the Indemnity shareholder interest, and the Exchange retained a 78.4% ownership interest in EFL, which accrued to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest.  Due to the sale of Indemnity’s 21.6% ownership interest in EFL to the Exchange on March 31, 2011, 100% of EFL’s life insurance results accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after March 31, 2011.

Expense allocations

All claims handling services for the Exchange are performed by Indemnity employees who are entirely dedicated to claims related activities.  All costs associated with these employees are reimbursed to Indemnity from the Exchange’s revenues in accordance with the subscriber’s agreement.  Indemnity is reimbursed by EFL from its revenues for all costs associated with employees who perform life insurance related operating activities for EFL in accordance with its service agreement with Indemnity.  Cash settlements for payments on the account of the Exchange totaled $325 million, $293 million and $282 million in 2011, 2010 and 2009, respectively, and $28 million, $27 million and $32 million in 2011, 2010 and 2009, respectively, for EFL.  These reimbursements have generally been settled quarterly; however, beginning in the fourth quarter of 2011, the reimbursements are settled on a monthly basis.

Common overhead expenses included in the expenses paid by Indemnity are allocated based upon appropriate utilization statistics (employee count, square footage, vehicle count, project hours, etc.) specifically measured to accomplish proportional allocations.  Executive compensation is allocated based upon each executive’s primary responsibilities (management services, property and casualty claims operations, EFL operations and investment operations).  We believe the methods used to allocate common overhead expenses among the affiliated entities are reasonable.

Office leases

Indemnity leases certain office space from the Exchange, including the home office and three field office facilities.  Rent expenses under these leases totaled $6 million in 2011, 2010 and 2009.  Indemnity also has a lease commitment with EFL for a branch office until 2018.  Annual rentals paid to EFL under this lease totaled $0.4 million in 2011 and 2010 and $0.3 million in 2009.

Direct method of cash flows

Indemnity’s components of direct cash flows as included in the Consolidated Statements of Cash Flows are as follows for the years ended December 31:

(in millions)		Indemnity Shareholder Interest
		Direct method of cash flows
		2011			2010			2009
Management fee received		$	1,053		$	947		$	912
Service agreement fee received		33			34			35
Premiums collected (1)		–			220			214
Net investment income received (1)		22			45			45
Limited partnership distributions		22			21			13
(Decrease) increase in reimbursements collected from affiliates		(9		)	(15		)	3
Commissions and bonuses paid to agents		(583		)	(532		)	(535		)
Salaries and wages paid		(124		)	(106		)	(110		)
Pension contribution and employee benefits paid		(36		)	(33		)	(32		)
Losses paid (1)		–			(132		)	(123		)
Loss expenses paid (1)		–			(23		)	(22		)
Other underwriting and acquisition costs paid (1)		–			(53		)	(54		)
General operating expenses paid		(127		)	(119		)	(104		)
Income taxes paid		(82		)	(61		)	(62		)
Net cash provided by operating activities		169			193			180
Net cash (used in) provided by investing activities		(211		)	196			(69		)
Net cash used in financing activities		(257		)	(155		)	(96		)
Net (decrease) increase in cash and cash equivalents		(299		)	234			15
Cash and cash equivalents at beginning of year		310			76			61
Cash and cash equivalents at end of year		$	11		$	310		$	76
(1)	Prior to and through December 31, 2010, the underwriting results retained by EIC and ENY and the investment results of EIC, ENY and EPC accrued to the Indemnity shareholder interest.  Due to the sale of Indemnity’s property and casualty insurance subsidiaries to the Exchange on December 31, 2010, all property and casualty underwriting results and all investment results for these companies accrue to the interest of the subscribers (policyholders) of the Exchange, or noncontrolling interest, after December 31, 2010.